Economists have warned that the ongoing conflict between Iran and Israel could exacerbate the Bank of England’s attempts to control inflation. Since the conflict intensified last week, oil prices have surged and exposed vulnerabilities in the bank’s forecasts.
Prices rose from $65 per barrel to $74 dollars following the start of bombing between the two nations, with the impact threatening to increase inflation as high as 4% this year, twice as high as the bank’s 2% forecast. Speaking at Pantheon Macroeconomics, Robert Wood said: “Events in the Middle East driving up oil prices last week are a reminder of just how close to the wind the Monetary Policy Committee is sailing. We find it far from implausible that inflation ends next year above 3% if events in the Middle East worsen, or a cold winter boosts natural gas prices.”
He added that increased inflation could have knock-on effects in areas such as energy prices and the labour market as workers demand higher wages to cover the cost of increased bills.
Inflation rose to 3.4% in April, the highest level seen in more than a year.
George Buckley, economist at Nomura, said: “We have had an energy shock in the past and look where it led us: to a whopping increase in inflation across the board, not just for energy, which did require a monetary policy response.”
Mr Buckley warned that higher oil prices have far-reaching consequences beyond the price at the pump, with the ability to halt investment plans for businesses which in turn can slow down the economy.
Overnight, eleven people were killed and 100 others wounded in five locations across Israel after Iran launched a wave of drones and missiles in response to Israeli airstrikes.
World leaders have called for a de-escalation in the conflict which intensified after Israel struck targets inside Iran in a bid to halt Tehran’s growing nuclear weapon ambitions.
Earlier today, explosions could be heard across the Iranian capital as residents of an affluent northern neighbourhood of Tehran known as “District 3” were warned to evacuate as Israel warned that it would “strike military infrastructure of the Iranian regime.”
The area houses government ministries, foreign embassies and museums.
